St. Louis Sewer District Wins One Triple-A, Loses Another

CHICAGO — The Metropolitan St. Louis Sewer District got mixed signals from rating agencies this week, winning an upgrade to AAA from Standard & Poor's while losing its top mark from Fitch Ratings ahead of a $53 million revenue bond sale next week.

The competitive sale is slated for Dec. 8. Public Financial Management Inc. and ButcherMark Financial Advisors LLC are advising MSD on the sale and Gilmore & Bell PC and White Coleman & Associates LLC are bond counsel. The bonds are secured by most of MSD's net wastewater operating revenues.

With the deal exhausting bond authority from a $275 million 2008 referendum, the agency plans to seek voter approval next year for $945 million in new capacity as it embarks on projects under a four-year, $1.9 billion capital program. The plan is part of a larger $4.7 billion series of projects anticipated over the next two decades under a consent degree with federal authorities pending before the courts.

The settlement resolves claims the Justice Department, the Environmental Protection Agency, and environmental groups brought against the district in 2007. The litigation resembled action taken by the EPA against other major cities alleging violations of federal clean-water laws by allowing untreated sewage to seep into area waterways and the ground.

The agency had tentatively planned to seek board approval to place the referendum on the February ballot, but decided recently to wait until later in 2012 to ask for the new authorization, in part to provide more time to explain its plans to the public. "A February election allows very little time for community outreach and education on the issues that are involved," said MSD spokesman Lance LeComb.

The consent decree also has yet to be formally entered into by the court. The Missouri attorney general has refused to sign off on it, but all other parties have agreed. Though MSD could still move forward with the referendum, it prefers to have the decree in place.

Standard & Poor's raised the agency's rating Wednesday to AAA from AA-plus. "The upgrade reflects the system's maintenance of a strong financial position with timely rate increases while continuing to successfully manage capital needs in anticipation of a consent decree order that was approved in 2011," said analyst Corey Friedman.

Fitch took a differing view, dropping the rating on the new deal and $353 million of outstanding debt to AA-plus from AAA, citing MSD's weakened financial position and rising debt.

"The downgrade … reflects reduced debt service coverage and the likelihood that margins will remain at these lower levels going forward as a result of accelerated capital spending and related debt associated with the capital improvement and replacement program and recent consent decree," Fitch wrote, adding debt service coverage had weakened to below its expectation to 1.6 times in fiscal 2010 from 2.6 times in 2009.

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